The political economy of farmer co-operative development in China

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This is a study to understand and interpret the governance structure of and the pattern of development followed by farmer co-operatives in China. China's farmer co-operatives have developed rapidly since the Farmers Co-operative Law came into force in 2007. Unlike their counterparts in western democratic capitalist systems, however, farmer co-operatives in China are owned and controlled by individuals and groups other than farmers -- the resulting structure is referred to as the Company+Household (C+H) co-operative. As a result, the small farmers who make up the majority of members have very little participation or control in these organizations. This thesis also uses the development of farmer co-operatives as a lens through which Chinese agriculture and rural development can be viewed and understood. The proposition examined in the thesis is that the pattern of co-operative development is the expected outcome given the challenges that China is facing in its agricultural sector, China's economic development goals, and the political economy of the country.
The thesis examines the governance structure -- i.e., the way in which business entities are structured and controlled -- of C+H cooperatives using political economy theories. This theory argues that corporate governance structures reflect public policy choices. These policy choices are fundamentally the result of political decisions, decisions that are heavily influenced by the preferences and power resources of different groups in a society, as well as by the existing political and economic institutions. China's political economy shapes ``a capitalism with Chinese characteristics.' All capitalist systems require mechanisms that coordinate decisions and expectations. Due to a lack of institutionalized trust (e.g., trust created by reliance on the rule of law and independent judiciaries), China relies on other mechanisms for this coordination. Meanwhile, minority shareholder protections (e.g., auditing and disclosure rules) are virtually absent. The outcome is an economic system in which a blockholder ownership pattern emerges as the most effective governance structure, with the state and large investors (both of which have close personal ties to other investors and other state officials) as the blockholders. Within this system, there is little room for the small investor. Consequently, China's political economy provides an environment in which farmer co-operatives that are owned and operated by small farmers, and in which the state and large private interests are largely absent, would be very unlikely to exist.
The thesis also uses industrial organization theory to analyze C+H co-operatives in the context of agricultural industrialization. The argument developed in this thesis suggests that C+H cooperatives have also emerged as the most likely organizational structure for reasons unique to the agricultural sector. Specifically, the industrialization that has occurred in agriculture around the world during the last two decades has created a need for much greater coordination within agricultural supply chains as companies within this chain attempt to provide a rapidly increasing range of products that must meet increasingly higher standards of consistency, quality and safety. Therefore, agro-processors increasingly specify the type and quality of product produced by farmers, who are often contractually required to buy inputs from and to sell output to a particular processor.
A key outcome of the research in this thesis is that the development of farmer co-operatives has to be seen as an endogenous response to the political and economic interests operating in China at the time the co-operative law was introduced. The beliefs and associated behaviours of those that benefit from the emergence of this particular policy helped to enforce and reinforce the emergence of new organizational forms that further perpetuate the power of those that initially benefitted. This self reinforcement (i.e., positive feedback) creates path dependency, which in turn explains the persistence of high modernism, capitalism with Chinese characteristics and patron-client structures, all of which contributed to formation of C+H cooperatives. The C+H co-operatives not only have a governance structure that fits into the political structure, but they provide a large degree of control by the company (i.e., the agro-processor) over the decisions made by farmers, which are crucial to meet the coordination needs of modern supply chain. The conclusion is that the political and economic institutions in China today do not provide an enabling environment for the establishment and the success of farmer self-help groups. As a consequence of both China's larger political economy and the conditions specific to agriculture, it is to be expected that the C+H model of a co-operative has emerged as the dominant organizational form for co-operatives in China.